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Why a Carbon Tax Is Bad for the Country

Why a Carbon Tax Is Bad for the Country

This week, a self-described "who's-who of conservative elder statesmen" launched a new organization, the Climate Leadership Council, to make their "Conservative Case for Carbon Dividends." Lest one be confused, the proposal is yet another carbon tax. Lest one be optimistic, it manages only to weaken an already flawed policy.

Carbon-tax proposals have circulated for years with a straightforward rationale: if carbon dioxide emissions are causing harm, taxing them could achieve emissions reductions while generating government revenue. By raising the tax over time, more and more emissions would eventually be eliminated. For those on the right, the concept of a "revenue-neutral" tax has held particular appeal. If the tax revenue goes toward other tax cuts or cash payments to households, government does not grow. The CLC proposal adopts a pure cash-to-households approach, thus the "dividend."

In the marketplace of ideas, the carbon tax behaves increasingly like a government-run utility. It doesn't care about competition.

The centrality of the dividend, however, is the giveaway that this is a political, not a policy, initiative. Perhaps taxing the consumption of cheap energy and then mailing every American a check is good politics. The proposal promises to respond to the "powerful trends" that elevated Donald Trump to the White House, "redirect this populist energy in a socially beneficial direction," and "tip the economic scales towards the interests of the little guy," all while appealing to "Asians and Hispanics--the fastest growing demographic groups."

Even if any of this were true, the policy would remain bad for the country, in ways that the proposal's authors fail to acknowledge, let alone address. For instance, the concept of revenue neutrality is a mirage. Yes, every dollar raised by the tax can be sent back to households. Remember, though, that the entire premise of the tax is to force households and businesses away from cheap fossil-fuel consumption and toward higher-cost (but lower-emission) alternatives. The extra money spent on these alternatives generates no tax revenue. As more energy consumption shifts toward these high-cost/low-emission sources, more of the economic burden of the policy takes an obviously non-neutral, non-refundable form.

The authors appear unaware of this, writing instead that "[the dividend] amount would grow over time as the carbon tax rate increases, creating a positive feedback loop: the more the climate is protected, the greater the individual dividend payments to all Americans." But better climate protection requires eliminating emissions and thus the tax base that would fund dividend payments. Far from creating a positive feedback loop, a system in which increasing tax rates squeeze ever-higher revenue out of ever-lower emissions creates a vicious cycle. Households bear the costs but receive no offsetting dividend because emissions-free technologies generate no carbon-tax revenue.

A second problem, of which the authors must have been aware, is that a tax-and-dividend model is bad for the economy. As the Congressional Budget Office has observed, there is "a trade-off between the goals of helping those households most hurt by the tax and helping the economy in general." This is intuitively correct. If it were good economic policy to raise taxes and mail the ensuing revenue out to households, policymakers could have done that long ago with any old tax. The challenge was also confirmed by a comprehensive study, "Implementing a U.S. Carbon Tax," published in 2015 by think tanks across the ideological spectrum. Reviewing the economic modeling for a number of different proposals, it found that all had large net costs unless the tax revenue was used to cut taxes on capital.

The authors ignore this, instead asserting without evidence that "our plan would strengthen the economy," suggesting that the "strategy would double as a growth strategy" and even claiming that the cost to the country of adopting their plan is "zero." Have so many Harvard economists and former Treasury secretaries ever jumped so enthusiastically at the promise of a free lunch?

Third, would the proposal meaningfully reduce the threat of climate change? Presumably that is the point of the exercise. But while the "Conservative Case" whitepaper includes headings for "Helping Working-Class Americans," "Strengthening Our Economy," "Shrinking the Size of Government," "Stabilizing an Unstable World," and "Consolidating Conservative Leadership," mitigating the threat of climate change doesn't make the cut.

The CLC says only that its tax would start around $40 per ton and then "increase gradually until emissions reduction targets are met." But what targets? And what tax increases might that require? A hint appears midway through another CLC whitepaper, which suggests that the tax may need to increase to $200 per ton within a decade and uses the $200-per-ton level in other examples.

Such a tax is extraordinarily high. In the "Implementing" analysis, only one of the proposals under consideration ever reached more than $60 per ton. The reduction in GDP from that one exception--which, like this proposal, sought to raise the tax rapidly in pursuit of specific emissions targets--was by any measure extreme. Of course, the proposal's effect on global emissions would depend almost entirely on major developing countries imposing comparable handicaps on their own economies.

None of these objections or challenges is new. Yet, in the marketplace of ideas, the carbon tax behaves increasingly like a government-run utility. It doesn't care about competition. It ignores complaint with impunity. Its business model depends on the strength of its political connections, not the quality of its product. Elder statesmen often sit on the boards of such entities. Rarely do they achieve positive change.